The following Fair Franchising Standards (“Standards”) are hereby adopted to provide a suitable framework for franchise agreements, foster franchising business relations and govern membership in and accreditation by the Philippine Franchise Association (“PFA”).

I.OBJECTIVES

The objectives of the Standards are as follows:

1. To promote growth of the franchising sector;

2. To establish uniform standards of conduct to govern franchise relationships between PFA Members who are franchisors and their franchisees;

3. To develop a set of principles to govern the business and legal relationships of legitimate franchisors and franchisees; and

4. To promote self-regulation of the franchising sector.

II.DEFINITION OF “FRANCHISE”

A “franchise” is a business relationship wherein, for a consideration, the Franchisor grants to the Franchisee a licensed right, subject to agreed-upon requirements and restrictions, to conduct business utilizing the business format and trade/service marks of the Franchisor.

III.SCOPE OF APPLICATION

The Standards cover members of the Philippine Franchise Association (“PFA”) who are engaged in the business of franchising in the Philippines.

IV.ACCREDITATION

Members of the PFA who are franchisors and who would like to market their franchises in PFA-sponsored activities under the PFA seal must abide by the following accreditation process:

1. Criteria

1.1 An applicant for accreditation shall submit to the PFA its Franchise Offering Circular (FOC).

1.2 The PFA, through its appropriate committee, will first determine if the applicant is a member in good standing of the PFA. Thereafter, it will review the completeness of the applicant’s FOC for compliance with these Standards.

1.3 In addition to the other requirements for PFA membership, an applicant for accreditation must have been in the business of franchising for a minimum of three (3) years, either as an operator or a franchisor, shall have at least three (3) company owned outlets, and with at least three (3) franchise outlets in existence at the time of its application.

1.4 An applicant who satisfies any two (2) of the following:

• at least three (3 ) company-owned outlets, at least three (3) franchise outlets, at least three (3) continuous years of operating the business sought to be franchised, (The three- year operating requirement will be deemed to have commenced with the operation of the first outlet.) may be awarded probationary accreditation.

An applicant awarded probationary accreditation is entitled to full accreditation once it meets all the requirements.

2. Duty of Existing PFA Members

Those who are regular members of the PFA on the date that these Standards take effect and who desire to be accredited are given three (3) years from that date to comply.

3. Benefits of Accreditation

3.1.An accredited member of the PFA may market its franchise through PFA-sponsored activities.

3.2. An accredited member may exhibit the authorized PFA seal or logo in its marketing materials subject to reasonable restrictions that may be imposed by the PFA Board.

V. FRANCHISE NEGOTIATION

1. Before any Franchise Agreement is signed, Franchisor must give the franchise applicant at least thirty (30) days to review the FOC. The FOC is a document that shall provide the following information

1.1. History of the franchise system being offered, including the number of outlets opened, in operation, company-owned and franchisee-operated, and franchised outlets closed over the last five (5) years.

1.2. A description of the business concept and how it differentiates itself from the competition.

1.3. The key terms of the Franchise Agreement.

1.4. Full disclosure of the financial requirements of the franchise business.

1.5. A listing of the Franchisor’s key officials and a brief description of their qualifications and background.

1.6. A summary of past and present litigation involving the franchise system being offered over the last five (5) years.

1.7. A provision that requires the franchise applicant to seek adequate legal and financial counsel before signing the Franchise Agreement.

2. Franchisor must give the franchise applicant at least fourteen (14) days to review the proposed Franchise Agreement.

3. Franchisor must provide the franchise applicant with a written explanation of the significant provisions of the proposed Franchise Agreement.

4. The Franchisor shall encourage the franchise applicant to consult with or gather relevant information from franchisees about the Franchisor and the franchise business being offered.

5. The Franchisor shall encourage the franchise applicant to seek adequate legal and financial advice before signing the Franchise Agreement.

VI. TRADEMARK / SERVICE MARK

1. Franchisor must be the registered owner, or must have at least a pending application with the Philippine Intellectual Property Office over the trademark/service mark of the business sought to be franchised, or is duly authorized to allow the use of said mark by the registered owner.

2. Franchisor must disclose in the Franchise Agreement the terms of usage of the trademark/service mark.

3. Franchisor must maintain its exclusive rights to the trademark/ service mark and diligently protect its right to said mark.

4. Franchisor shall defend, at its own cost, the right of its Franchisee to use said mark against any third party challenge.

VII. BUSINESS FORMAT

1. Franchisor must invest time and resources to put into an Operating Manual in sufficient detail significant aspects of the business to be franchised.

2. Franchisor must provide the Franchisee with the Operating Manual before the opening of the franchised outlet but after the relevant franchising agreements have been signed and the agreed fees have been paid.

3. The Franchisor must provide adequate start-up and on-going training to the Franchisee and its personnel to ensure that the Franchisee operates the business according to the operating standards of the Franchisor.

VIII. DISPUTE RESOLUTION

The Franchisor should endeavor to exhaust all measures of resolving disputes with its Franchisee. As far as practicable, the Franchisor shall endeavor to resort to non- judicial remedies as a way of settling disputes with its Franchisee and provide for such mechanism in its Franchise Agreement.

IX. EFFECTIVITY CLAUSE

The Standards shall take effect thirty (30) days after its approval in a general membership meeting called for that purpose.

FAQ

Fair Franchising Standards

1.What are the Fair Franchising Standards (FFS) of the Philippine Franchise

Association (PFA)?

The FFS is an agreed set of standards that the members of the PFA have adopted relating to how PFA members who engage in franchising must conduct the sale of their franchises.

(c) To develop a set of principles to govern the business and legal relationships of

legitimate franchisors and franchisees.

(d) To promote self-regulation of the franchising sector.

3.What are the Implementing Rules and Regulations of the FFS?

The Implementing Rules and Regulations (IRR) of the FFS provide the operating guidelines for the implementation of the FFS. The FFS is the main document while the IRR provides the operating details.

4.Who are covered under the FFS?

The FFS basically covers all members of the PFA who are engaged in franchising in the Philippines (i.e., PFA members who authorize third parties to use the PFA members’ operating systems and trademarks within a defined territory subject to the payment of an agreed consideration).

5.What is the rationale behind the FFS and its IRR?

Membership in the PFA carries with it the distinction of being identified with the most reputable companies in the Philippines. The FFS and its IRR require each PFA member to observe a uniform set of procedures in the preparation of its franchise agreement and in the negotiation thereof with would-be franchisees. Moreover, the regulations require the PFA member to disclose a uniform set of facts regarding the franchise being offered. All these measures are calculated to enable any would- be franchisee to have the opportunity to check the member’s business credentials so that the would-be franchisee can make an “informed decision” regarding the franchise being offered. In this manner, the public’s perception of the PFA as a professional organization and the high esteem accorded to its members will be preserved and protected at all times. Also, franchising is promoted as a reliable method of business expansion if one is to deal with a franchisor that is a member of the PFA.

6.What are the salient provisions of the FFS and its IRR?

(a) A PFA member or a person applying for membership who is engaged in franchising in the Philippines must be accredited (Rule IV, IRR).

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(b) Accreditation is given if the applicant have been in the business of franchising for a minimum of three (3) years, either as an operator or a franchisor, shall have at least three (3) company-owned outlets, and with at least three (3) franchise outlets in existence at the time of its application (Rule IV 1.3).

(c) As part of the accreditation process, the applicant is required to file with the PFA a Franchise Offering Circular (FOC). The FOC is basically a pro- forma document prepared by the PFA that discloses material facts about the franchise business being offered. These facts are calculated to give the would- be franchisee basic data to help the latter decide whether to obtain the franchise or not. The IRR requires that the FOC be provided to the would-be franchisee prior to the execution of the franchise agreement (Rule IV, IRR).

(d) The IRR also requires certain mandatory provisions (Rule VII) to be indicated in the franchise agreement of the applicant. This is done to ensure that the basic rights of the parties are protected and adequately provided for.

(e) To ensure full compliance, the applicant is also required to attend a seminar on the FFS Compliance Program to be conducted by the Continuing Education Committee of the PFA. This will instruct the applicant on how to comply with the FFS and its IRR.

(f) Finally, a guideline on how to negotiate the sale of the franchise must be followed (Rule VII, IRR) by every accredited member. This is to ensure that the negotiation is done in an “even-handed” manner.

(g) Once accredited, a PFA member can use the PFA seal and logo in franchising its business concept (Rule IV, Sec. 3). Accreditation does not guarantee that the franchise being offered is legitimate in all respects. However, with the safeguards required under the FFS and the accreditation process, the person dealing with the PFA member is given a vastly greater opportunity to investigate the details of the franchise business being offered.

7.What about those who are already members when the FFS was adopted?

Can they be accredited?

Those who are already members of the PFA at the time of the effectivity of the FFS and its IRR and who are engaged in franchising are given three (3) years from the date of approval of the FFS by the members of the PFA to be accredited.

8.Are there sanctions for violation of the FFS and its IRR?

A member of the PFA who violates the provisions of the FFS or its IRR shall, upon review by the PFA Board, be subjected to such sanctions as the Board may deem appropriate.

9.When will the PFA begin implementing the FFS and its IRR?

Although the FFS has already been approved by the membership of the PFA and the Board enjoys full authority to adopt the IRR as is, the Board nevertheless decided to consult the general membership to ascertain their views on the IRR. After the consultation, to be done within 2004, the Board will decide when to proceed with the implementation of the FFS and its IRR.